CATEGORY: CHAPTER 4:

EXTINGUISHMENT OF OBLIGATIONS

Article 1231
Obligations are extinguished:
(1) By payment or performance;

(2) By the loss of the thing due;

(3) By the condonation or remission of the debt;

(4) By the confusion or merger of the rights of creditor and debtor;

(5) By compensation;

(6) By novation.

Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of

a resolutory condition, and prescription, are governed elsewhere in this Code. (1156a)

Ang mga obligasyon ay mawawala o matatapos kapag nangyari na ang mgasumusunod na ba

gay:

(1.) Sa pagbabayad o pag ganap;

(2.) Sa pagkawala ng bagay na kailangan ibayad o ibigay;

(3.) Sa pagbibigay ng kapatawaran o ng pagbabalewala ng utang;

(4.) Ang pagsasama sa iisang tao ng obligasyon ng pagiging nagpautang atumutang;

(5.) Palitan ng obligasyon;

(6.) Pagpapalit ng panibagong obligasyon.

Ang mga ibang dahilan ng pagkatapos o pagkawala ng obligasyon katulad

ngannulment, rescission, at pagsagawa o katuparan ng resolutory condition, and prescription,
ay pinamamahalaan ng ibang artikulo mula sa Code na ito.

Other causes of Terminating Obligations:

1.Waiver or Renunciation

2.Mutual Agreement

3.Compromise

4.Fulfillment of Resolutory Condition (Art 1179)

5.Expiration of Resolutory Term (Art 1139)

6.Prescriptio

7.Death of the debtor when the obligation is purely personal

8.Decision or will of one of the parties in certain contracts like agency, partnership

9.Happening of unforeseen events

10.Abandonment of the property charged with an obligation

Article 1232
Payment means not only the delivery of money but also the performance, in any other
manner, of an obligation.

Ang pagbabayad ay hindi lamang ang pagdadala ng pera ito rin ay may kasamang
pagsasagawa, kahit sa ano mang kaparaan, ng isang obligasyon.

‘Payment’ defined
 Payment is that mode of extinguishing obligations which is consists of:

 The delivery of money, or

 The performance in any other manner of an obligation.

(Example: rendition of the required service)

Article 1233
A debt shall not be understood to have been paid unless the thing or service in which the
obligation consists has been completely delivered or rendered, as the case may be. (1157)

Ang utang ay hindi naiintindihang nabayaran na hangga’t ang bagay or serbisyo na nakapaloob
sa obligasyon ay buong nabigay na o nagawa na, alin man sa dalawang nabanggit.

Discussion:

Payment extinguishes debt.

Evidence of payment of burden of proof

Presentation of receipt is a good proof of payment. Therefore, a debtor can demand the issuance
of a receipt from the creditor once his debt is paid. Consignation may be requested by the debtor
in case the creditor refused to issue the receipt. The burden of proof of payment lies on the
debtor, after the creditor has shown that the debt exists.

Article 1234
If the obligation has been substantially performed in good faith, the obligor may recover as
though there had been a strict and complete fulfillment, less damages suffered by the
obligee.

Kung ang obligasyon ay natupad o nagawa ang importanteng parte ng obligasyon, ang gumawa
ay maaring maningil na tulad sa pagsisingil niya kung ang obligsyon any natapos, maliit
lamang ang nawala sa nagpagawa.

Discussion:

Substantial Compliance
Substantial compliance means that the debtor, when in good faith, has attempted to perform the
contract or prestation, but through oversight, or any excusable neglect, he failed to make a full
and complete performance, for which the other party may be indemnified, there is already a
substantial compliance and the debtor shall recover as though there had been a strict and
complete fulfillment of the obligation.

The omission or defect must be slight, unimportant, or not so material in the obligation as to
frustrate the accomplishment of the intended work. The omission or defect must also be in good
faith, that is, it was not intended by the debtor.

Right to Rescind

The right to rescind if there is substantial compliance cannot be invoked. This is because the
obligee has already benefited from the obligation.

Case Illustration

Gaboya vs Cui 38 SCRA 85 (1971)

Ponente: JBL Reyes

Facts:

Don Mariano Cui is the owner of three lots situated in the City of Cebu. He sold these lots to his
three children, however, the sale of the third lot was canceled due to the lack of funds of the
vendee. Because of the cancellation, Don Cui and his children Mercedes and Antonio became co-
owners of the whole mass in equal portions.

In the deed of sale, Don Cui retained for himself the usufruct of the property. Don Cui had his
property rented, and to the rest of the property, a 12-door commercial building was constructed.
To finance the construction, the whole three lots was mortgaged. However, Don Cui did not join
in the construction of the commercial building.

When Don Cui was declared by law as incompetent on the petition filed by Rosario, the child
who was one of the original vendees, Victorino Reyes was appointed as the guardian of his
property.

The guardian thereafter filed a complaint alleging that the usufructuary right reserved in favor of
Don Mariano Cui extends to and includes the rentals of the building constructed by Antonio Cui
and Mercedes Cui on the land sold to them by their father; and that the other children of Cui
retained those rentals to themselves; that the usufructuary rights of the father were of the essence
of the sale and their violation entitled him to rescind the sale. The complaint prayed either for the
rescission with accounting, or for delivery of the rentals of the building with interests, attorney’s
fees and costs.

Issue: Whether or not the rescission should be granted?

Held:

No.

The right to rescind a contract in reciprocal obligations cannot be invoked when there has been
only slight breaches of the obligation because if the performance is substantial, that is equivalent
to fulfillment or payment of the obligation. The Court may even allow a person in default some
time within which to fulfill the obligation.

Article 1235
When the obligee accepts the performance knowing its incompleteness or irregularity, and
without expressing any protest or objection, the obligation is deemed fully complied with.

Kapag ang pinagkakautangan ay tumangap ng hindi sapat o hindi tama at hindi sya nagreklamo
o umangal, ang obligasyon ay paniniwalaan na nagawa na ng buo.

*The word “ACCEPT” on this article means to take as “satisfactory or sufficient,” or to “ give
assent” or to “agreed” or “accede” to an incomplete performance. The creditor has waived his
right to question the defect/s by accepting the incompleteness without making any protest or
objection.

Case Illustration: Julian Naval vs. Hermogenes Benavides

Article 1236
The creditor is not bound to accept payment or performance by a third person who has no
interest in the fulfillment of the obligation, unless there is a stipulation to the contrary.

Whoever pays for another may demand from the debtor what he has paid, except that if he
paid without the knowledge or against the will of the debtor, he can recover only insofar as
the payment has been beneficial to the debtor. (1158a)
 Ang nagpapautang ay hindi kabilang o nasasakop ng pagtanggap ng pagbabayad ng ikatlong
tao na walang kinalaman o interes sa kaganapan ng obligasyon, maliban kung mayroong
kasunduan sa isang banda.

Ang sinumang nagbayad para sa iba ay maaaring makapaningil sa nangutang ng kanyang

binayaran, maliban na kung siya ay magbayad ng hindi alam at hindi ayon sa kagustuhan ng
nagpautang, mababawi o masisingil lamang niya ito kung ang pagbabayad ay may
kapakinabangan sa inutang.

If the third person pays the obligation of the debtor with the knowledge and consent of the latter,
the payor is entitled to be reimbursed for the full amount he paid. Same rule applies if the debtor
knows that the third person is making a payment but he did not object thereto or he did not
repudiate at the same at anytime.

If the payment was made without the knowledge of or against the debtor’s will, the
reimbursement shall be only up to the amount or extent by which the debtor was benefited.
Consequently, if the debt had already prescribed or had already been compensated, the payment
would no longer be beneficial to the debtor. Under situation, the payor is definitely not entitled to
reimbursement from the debtor.

Article 1237
Whoever pays on behalf of the debtor without the knowledge or against the will of the
latter, cannot compel the creditor to subrogate him in his rights, such as those arising from
a mortgage, guaranty, or penalty. (1159a)

Sinuman magbayad sa ngalan ng umutang ng hindi nito alam o hindi ayon sa kanyang
kagustuhan, hindi mapipilit ang nagpautang upang mapalitan sya sa kanyang mga karapatan,
tulad ng mga bagay mula sa pagkasanla, garantiya o multa.

DISCUSSION

Consequences of Payment Made By A Third Person Without The Knowledge or Against The
Will of The Debtor

1. He can only recover the payment that is beneficial to the debtor.

2. He cannot place himself to have all the rights pertaining to the debtor.

Article 1238
Payment made by a third person who does not intend to be reimbursed by the debtor is
deemed to be a donation, which requires the debtor’s consent. But the payment is in any
case valid as to the creditor who has accepted it. (n)

Ang bayad na ibinigay ng ikatlong tao para sa inutang ng isang tao na hindi na inaasahang
maibalik ang kabayaran sa kanya ay kinokonsidera na isang donasyon, na nangangailangan ng
kaalaman ng nagpautang. Ito ay may bisa kung sakalit tinanggap ito ng nagpautang.

Article 1239
In obligations to give, payment made by one who does not have the free disposal of the
thing due and capacity to alienate it shall not be valid, without prejudice to the provisions
of Article 1427 under the Title on “Natural Obligations.” (1160a)

Sa obligasyon ng pagbibigay, walang bisa ang pagbabayad na ginawa ng isang tao na walang
kalayaan sa pagbabayad ng bagay na may palugit, at may kakayahan na ilipat ang pagmamay-
ari nito ng walang pagkiling sa probisyon ng artikulo 1427 na sumasailalim sa titulo ng Natural
na Obligasyon.

Discussion:

Free disposal of the thing due means that the thing to be delivered must not be subject to any
claim or lien or encumbrance of a third person (e.g. mortgage, pledge)

Capacity to alienate means that the person is not incapacitated to enter into contracts and for that
matter, to make a disposition of the thing due.

**no case cited

Illustrations:

Joana agreed to sell to Cardo a car. If the car set to be delivered by cardo by Joana owned by
Lola Kap without any agreement and authority to the Joana to sell the car , the same can be
recovered by Lola Kap the payment is not valid, Joana does not have free disposal of the car the
thing to be delivered must not be subject to any claim or lien or encumbrance of a third person

Article 1240
Payment shall be made to the person in whose favor the obligation has been constituted, or
his successor in interests, or any person authorized to receive.
Ang pagbabayad ay maaaring lang gawin sa taong kung saan ay may pabor ang obligasyon na
kung anong nilalaman, o sa kanyang tagapagmana na may interes, o kahit kaninong tao na
pinahihintulutan na tumanggap.

Everett Steamship Corporation v. Bank of the Philippines Islands

Facts: Plaintiff is a corporation in Manila, the majority stockholders of which are American and
British citizens, Defendant is a banking corporation. Before December 1941, plaintiff had a
current account with the defendant, and on December 29, 1941, the plaintiff had a valid balance
in its favor of P53, 175.51, Philippine currency. During the Japanese occupation, the officers of
the plaintiff corporation were interned by the Japanese Armed Forces inside the UST compound.
By order of the Japanese Military Administration, the defendant was made to turn over the
account of the plaintiff to the Bank of Taiwan, the depository of Enemy Properties. The
Defendant thus gave to the Bank of Taiwan a check in the sum of P53, 175.51. After liberation,
plaintiff wanted to draw the P53, 175.51 it thought it still had, from the defendant bank. The
latter pleaded payment to the Bank of Taiwan.

Issue: May the plaintiff still recover from the defendant?

Held: “In the instance case, the issue involved is whether the Japanese Military Administration
could validly require the defendant-appellant to transfer to the Bank of Taiwan the balance of
plaintiff’s current account with the defendant.”

“In the Haw Pia case the same issue was involved. The Court ruled in the Haw Pia case that the
collection by the Bank of Taiwan of the China Banking Corporation’s credit from the latter’s
debtor, by order of the Japanese military administrator, was valid and released the defendant’s
obligation to the plaintiff”.

Article 1241
Payment to a person who is incapacitated to admnister his property shall be valid if he has
kept the thing delivered, or insofar as the payment has been beneficial to him.

Payment made to a third person shall also be valid insofar as it has redounded to the
benefit of the creditor. Such benefit to the creditor need not be proved in the following
cases:

1.) If after the payment, the third person acquires the creditor’s rights;

2.) If the creditor ratifies the payment to the third person;

3.) If by the creditor’s conduct, the debtor has been led to believe that the third person had
authority to receive the payment. (1163a)

Ang kabayaran sa isang taong walang kakayahang pangasiwaan ang kanyang ari-arian ay
balido kapag nabigay nya ang bagay na hinihingi sa kanya, o hangga’t ang kabayaran ay
naging benepisyal sa kanya.

Ang kabayarang ibinigay sa ikatlong tao ay balido hangga’t ang naging bunga nito ay
benepisyal sa inutangan. Ang benepisyong tinutuloy ay kinakailangang patunayan ng mga
sumusunod:

1.) Kung pagkatapos ng kabayaran, ang pangatlong tao ay nakuha ang karapatan ng
pinakautangan;

2.) Kung ni-ratify ng pinagkautangan ang kabayaran para sa pangatlong tao;

3.) Kung sa inaasal ng pinagkautangan, napaniwala niya ang may utang na ang pangatlong tao
ang may kapangyarihang tanggapin ang kabayaran.

Discussion:

Artile 1241 applies to payments made by the debtor with the intention to extinguish his debts.
The rationale behind this article is that, since the creditor is incapacitated and cannot administer
his own property, the creditor needs a legal representative or a guardian to receive the payment.
If there is none, the debtor may consign the thing in court so that he will be released from the
obligation.

Moreover, Article 1241 is an exception to the rule made by Article 1240 that states “Payment
shall be made to teh person in whose favor the obligation has been constituted, or his successor
in interest, or any prson authorized to receive it.” Payment to a third person may still be valid as
long the creditor is being benefited. Therefore, the validity of the payment is co-extensive to the
benefit the creditor receives. Nevertheless, this benefits require evidence to establish the extent
it was enjoyed.

Case Illustration: Panganiban vs. Cuevas (7 Phil. 477)

Article 1242
Article 1242
Payment made in good faith to any person in possession of the credit shall release the
debtor.

Ang pagbayad ng may utang na ginawa nang walang daya o malisya sa tao na may hawak ng
utang ay magpapalaya sa nangutang sa kaniyang obligasyon.

Discussion

This law is intended to protect the debtor from being required to pay again the payee.

Possession of credit

Possession of credit does not refer to the real creditor or his heirs, or the person authorized by
him or by law under Article 1240. It refers to the person who has the appearance of the creditor
but who actually is not.

This is different from possession of the document representing the document. For example, if a
document which is payable to order or to a definite person is in the possession of someone but
without any indorsement, the possession is not of the credit but only of the title, and payment to
the holder is not a valid payment.

The possession of credit means an actual and legal relation between the credit and the possessor
of the document. For example, an instrument payable to bearer is held by the person to whom it
is intended.

Case Illustration

Panganiban vs Cuevas 7 Phil 477 (1907)

Ponente: C.J. Arellano

Facts:

Panganiban is the owner of a parcel of land. He sold the land to Gonzales with a right to
repurchase. During the war, Panganiban failed to find Gonzales, and the land was attached by the
revolutionary government. Since Panganiban has a right to repurchase, he paid the repurchase
price to the revolutionary government in good faith. It turned out however that Gonzales sold the
land to Cuevas. Panganiban brought an action to recover the land from Cuevas.
Issue: Whether or not Panganiban has the right to recover the land from Cuevas, given that he
already paid the repurchase price to the revolutionary government.

Held:

No. Article 1164 (in the New Civil Code it is Article 1242) cannot be used in this case because
the payment to the revolutionary government was an invalid payment. The government merely
attached the property which attachment merely prohibited its alienation. For the provision to be
considered in this case, the revolutionary government must be in the possession of the credit.
However, it was not.

The remedy of Panganiban is to redeem the property from Cuevas by paying him the repurchase
price.

Article 1243
Payment made to the creditor by the debtor after the latter has been judicially ordered to
retain the debt shall not be valid.

Ang bayad na ginawa sa nagpautang ng nangutang pagkatapos siyang mautusan ng hukuman

na ibalik o bayaran ang kanyang utang ay hindi katangap-tangap.

*Applicable only in “debts” or “credits” not in property.

*Garnishment – proceeding by which a debtor’s creditor is subject to the payment of his own
debt to another.

Case Illustration: The Tayabas Land Company vs. Sharruf

Article 1244
The debtor of a thing cannot compel the creditor to receive a different one, although the
latter may be of the same value as, or more valuable than that which is due.

In obligations to do or not to do, an act or forbearance cannot be substituted by another act

or forbearance against the obligee’s will. (1166a)
Ang nagpapautang ay hindi kabilang o nasasakop ng pagtanggap ng pagbabayad ng ikatlong
tao na walang kinalaman o interes sa kaganapan ng obligasyon, maliban kung mayroong
kasunduan sa isang banda.

Ang sinumang nagbayad para sa iba ay maaaring makapaningil sa nangutang ng kanyang

binayaran, maliban na kung siya ay magbayad ng hindi alam at hindi ayon sa kagustuhan ng
nagpautang, mababawi o masisingil lamang niya ito kung ang pagbabayad ay may
kapakinabangan sa inutang.

The general rule is that the creditor shall be paid only what has been stipulated upon
because the contract between the contracting parties is the law between them. The contract shall
be respected.

The rule applies even though the thing being offered as substitute is worth more than the very
thing agreed to be delivered.

Personal positive or negative obligations, an act or forbearance cannot be substituted by another

act unless the creditor consents. The consent shall constitute a waiver of right.

Article 1245
Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in
money, shall be governed by the law of sales. (n)

Ang pagbabago sa pagbabayad, na kung saan ang pagaari ay nailipat sa nagpautang upang
matugunan ang nautang na salapi, ay dapat na mapamahalaan ayon sa batas ng bentahan

Discussion

There is dation in payment when property is alienated to the creditor in satisfaction of a debt in
money. Indeed, pursuant to Article 1232 of the Civil Code, an obligation is extinguished by
payment or performance. There is payment when there is delivery of money or performance of
an obligation. Article 1245 of the Civil Code provides for a special mode of payment called
dation in payment (dación en pago).

There is dation in payment when property is alienated to the creditor in satisfaction of a debt in
money. Here, the debtor delivers and transmits to the creditor the former’s ownership over a
thing as an accepted equivalent of the payment or performance of an outstanding debt. In such
cases,

Article 1245 provides that the law on sales shall apply, since the undertaking really partakes –in
one sense of the nature of sale; that is, the creditor is really buying the thing or property of the
debtor, the payment for which is to be charged against the debtor’s obligation. Dation in payment
extinguishes the obligation to the extent of the value of the thing delivered, either as agreed upon
by the parties or as may be proved, unless the parties by agreement – express or implied, or by
their silence – consider the thing as equivalent to the obligation, in which case the obligation is
totally extinguished.

Case Illustration: Lim Tay vs. Court of Appeals

Article 1246
When the obligation consists in the delivery of an indeterminate or generic thing, whose
quality and circumstances have not been stated, the creditor cannot demand a thing of
superior quality. Neither can the debtor deliver a thing of inferior quality. The purpose of
the obligation and other circumstances shall be taken into consideration. (1167a)

Kung ang obligasyon ay may kinalaman sa pagdadala ng bagay na hindi tukoy at walang
eksaktong paglalarawan, ang nagpapautang ay hindi makakapag-aatas ng obligasyon na may
mahigit na kalidad at hindi rin naman pwedeng magbigay ang umutang na may mahina o
mababang kalidad. Ang mga bagay na may kinalaman sa obligasyon ay kailangang bigyan ng
konsiderasyon.

Article 1247
Unless it is otherwise stipulated, the extrajudicial expenses required by the payment shall
be for the account of the debtor. With regard to judicial costs, the Rules of Court shall
govern. (1168a)

Maliban kung ito ay nasasaad, ang kinakailangan para sa extrajudicial na gastusin ay

pananagutan ng nangutang. Para naman sa judicial na gastusin ang panuntunan ng hukuman
ang siyang masusunod.

Discussion:

If the parties have made a stipulation as to who will bear the expenses, then their stipulation shall
be followed. Art. 1247 does not apply to expenses incurred by the creditor in going to the
debtor’s domicile to collect (Art. 1251)

Losing Party party generally pays judicial cost generally pays judicial cost. These are the
statutory amounts allowed to party to an action. Under Rules of Court Sec. 1, Rule 142 , the
costs of an action shall, as a rule be paid by the loMsing party. The court may, however, for
special reasons, adjudge that either party shall pay the costs or that the same be divided as may
be equitable.
 **no case cited

Illustration:

Mr. Dimaano is the owner of an apartment entered into an entered into a lease agreement with
Mr. Dela Cruz for the amount of P3,000.00 to be paid every 5th of the month. However, Mr.
Dela Cruz failed to make the payments for 4 months despite oral demands. Mr. Dimaano wish to
have Mr. dela Cruz vacate the property and collect the unpayed rental fee. He then seek the
service of Atty. Dela Torre and paid a fee of P5,000.00 . Two (2) demand letters sent via
registered mail and incurred P350.00 for such. Later on, Mr. Dela Cruz, forwarded his intent to
vacate the apartment and make the payment for his debt, which shall include the unpaid rental
and the expenses incurred upon hiring legal service.

Article 1248
Unless there is an express stipulation to that effect, the creditor cannot be compelled
partially to receive the prestations in which the obligation consists. Neither may the debtor
be required to make partial payments.

However, when the debt is in part liquidated and in part unliquidated, the creditor may demand
and the debtor may effect the payment of the former without waiting for the liquidation of the
latter.

Maliban na lamang na may pagpapahayag ng istipulasyon na magkaroon ng bisa, ang

nagpautang ay hindi maaaring pilitin ng paunti unti na tumanggap ng prestasyon kung saan ang
obligasyon ay nilalaman. Kahit pa ang umutang ay hilingin na bumayad ng hindi pa buo.

Subalit, kung ang utang ay pinagbayaran ang ibang parte or hindi pa nabayaran, ang
napautang ay maaaring sapilitan at ang umutang ay maaaring bigyan ng epekto ang dati ng
hindi na kinakailangan ng bayad ng nauna na.

1. Performance Should be generally be complete

Under Art. 1233 of the Civil Code, a debt shall not be understood to have been paid unless the
thing or service in which the obligation consists has been completely delivered or rendered, as
the case may be. Hence, partial performance is not allowed generally under Art. 1248.

2. Exceptions

Partial performance is allowed:

1. When there is stipulation to this effect;

2. When the different prestations are subject to different conditions or different terms;

(Example: a debt payable in installments)

1. When a debt is in part liquidated and in part unliquidated, in which case performance of
the liquidated part may be insisted upon either by the debtor or the creditor.

(Examples: D owes C P3 million plus damages. Even if the amount of damages has not yet been
ascertained, the P3million is already known or liquidated. This is already demandable and
payable.)

1. When a joint debtor pays his share or the creditor demands the same;

(NOTE: This is a complete payment of his share, but it is still a partial fulfillment of the whole
obligation.)

1. When a solidary debtor pays only the part demandable because the rest are not yet
demandable on account of their being subject to different terms and conditions;
2. In case of compensation, when one debt is larger than the other, it follows that a balance
is left.
3. When work is to be done by parts.

Article 1249
[The payment of debts in money shall be made in the currency stipulated, and if it is not
possible to deliver such currency, then in the currency to which is legal tender in the
Philippines.]

The delivery of promissory notes payable to order, or bills of exchange or other mercantile
documents shall produce the effect of payment only when they have been cashed, or when
through the fault of the creditor they have been impaired.

In the meantime, the action derived from the original obligation shall be held in abeyance.
(1170)

[Ang kabayaran ng utang sa salapi ay naaayon sa pera na nakasaad, at kung hindi posible na
ito ay mabigay sa ganoong pera, ito ay isasalin sa pera na legal na pinaiikot sa Pilipinas.]

Ang pagbibigay ng promissory notes na kabayaran sa order o sa pagpapalit ng perang papel, o

kahit na anong pangkalakal na dokumento, ay magbubunga lamang ng epekto na nakapagbayad
sa oras na ito ay napalitan ng salapi, o kung sa pagkakamali ng pinagkautangan ito ay nasira.
Samantala, ang aksyon nanggaling sa orihinal na obligasyon ang dapat na ipagpaliban.

Discussion:

The rule is different when there is extraordinary inflation or deflation under Article 1250,
wherein the value of the currency at the time the obligation was established shall be the basis of
payment, if there is an official pronouncement or declaration of an extraordinary inflation or
deflation.

Concept of Legal Tender

Legal tender refers to the currency which may be used for payments of debts whether public or
private, and which the creditor cannot refuse to accept. In the Philippines, the legal tender
covers all notes and coins issued by the Central Bank of the Philippines.

Also, under Presidential Decree No. 72, effective November 29, 1972, there is a limit in the use
of coins as legal tender to release the creditor from the burden of counting huge amounts of
money in coins. The creditor will find it troublesome not only to count them, but also to carry
them. So, he may not accept coins as payment beyond what the law allows.

1.) 1 centavo coins and 5 centavo coins are legal tender up to P20.00.

2.) Other coins (.10, .25, and P1) are legal tender up to P50.00

3.) Paper bills or money issued by the Central Bank are valid legal tenders for any amount unlike
coins.

Payment in Negotible Documents

Examples of negotiable documents are checks, promissory notes payable to order or bills of
exchange are not considered as legal tenders. Therefore, the creditor has the right to refuse
acceptance of these documents as payment, even if they happen to be good. The law says that
these papers shall produce the effect of payment only when they have been encashed – which
means they have been honored by the drawee bank and have been exchanged with cash money.

Rule on payment in check

A check is not a legal tender, whether it is an ordinary check or manager’s check. The rule
applies even if the check was consigned in court. However, there are exceptions to this rule:
1. When a manager’s check was consigned with the court which the clerk of court endorsed to
the Provincial Treasurer and which then honored by the bank and credited to teh treasurer’s
account;

2. When the creditor has accepted the debtor’s check for the repurchase of the latter’s property,
the former cannot, the following day refuse to accept the check anymore as payment. The
creditor is under estoppel having induced the debtor to believe that he had consented such form
of payment;

3. When after the payment of the check in court the vendor a retro, the vendee a retro petitioned
the court to allow him to withdraw the amount in deposit, the payment in check is valid;

4. When the check had lost its value due to the fault of the creditor, such when he unreasonably
delayed the presentation of the check with the drawee bank for payment, the payment in check is
valid;

5. When the foreign bill of exchange lost its value for the reason that the creditor had neglected
to make a protest. Had there been a timely protest, the debtor could have pursued the right of
recourse against the parties who are secondarily liable.

Case Illustration: Belisario vs. Natividad (60 Phil. 156)

Article 1250
In case an extraordinary inflation or deflation of the currency stipulated should supervene,
the value of the currency at the time of the establishment of the obligation shall be the basis
of payment, unless there is an agreement to the contrary.

Sa pagkakataong ang sobra-sobrang pagtaas o pagbaba ng pera na nasa stipulasyon ay

mangyayari, ang halaga ng pera sa oras na nagawa ang obligasyon ang magiging batayan sa
pagbayad, maliban lamang kung iba ang napagkasunduan.

Discussion

The inflation or deflation in this case must be extraordinary, meaning it is not a universal trend
which did not spare the country.

Extraordinary inflation exists when there is a decrease or increase in the purchasing power of the
Philippine currency which is unusual of beyond the common fluctuation on the valued of said
currency, and such increase or decrease could not have been reasonably foreseen or was
manifestly beyond the contemplation of the parties at the time of the establishment of the
obligation.
Necessity of official declaration

This provision only applies in extraordinary deflation or inflation. Hence, to distinguish it from
ordinary deflation or inflation, there must be an official pronouncement or declaration by
competent authorities of the existence of extraordinary inflation during a given period. Absent
such, this provision does not apply.

Although this provision speaks of obligation, it does not apply to all obligations but only to
contractual obligations. It cannot be applied to obligations arising from torts.

R.A. No. 6426

The only exception to the secrecy of foreign currency deposits is in case of a written permission
of the depositor.

Case Illustration:

Filipino Pipe and Foundry Corporation vs National Waterworks and Sewerage Authority
161 SCRA 32 (1988)

Ponente: J. Griño-Aquino

Facts:

In 1961, NAWASA entered into a contract with FPFC for the supply of pressure pipes. After
delivery and failure of NAWASA to pay in full, FPFC initiated a collection suit on 1967 at the
CFI of Manila. The trial court ruled in favor of FPFC, however NAWASA failed again to pay. On
1971, FPFC filed another complaint, this time, seeking an adjustment of the unpaid balance in
accordance with the value of the Philippine peso when the decision was rendered in 1967.

NAWASA filed a motion to dismiss but it was not granted by the Court. However, the complaint
filed by FPFC was also dismissed. Appeal was originally brought by the FPFC to the Court of
Appeals but since the principal purpose of the action was to secure a judicial declaration that
there exists extraordinary inflation within the meaning of Article 1250 of the New Civil Code, it
was forwarded to the Supreme Court, pursuant to Section 3, Rule 50 of the Rules of Court.

Issue: Whether or not there was extraordinary inflation within the meaning of Article 1250 of the
New Civil Code?

Held: No.
Extraordinary inflation exists “when there is a decrease or increase in the purchasing power of
the Philippine currency which is unusual or beyond the common fluctuation in the value said
currency, and such decrease or increase could not have reasonably foreseen or was manifestly
beyond contemplation the the parties at the time of the establishment of the obligation.
(Tolentino Commentaries and Jurisprudence on the Civil Code Vol. IV, p. 284.)

An example of extraordinary inflation is the following description of what happened to the

Deutschmark in 1920:

More recently, in the 1920’s Germany experienced a case of hyperinflation. In early 1921, the
value of the German mark was 4.2 to the U.S. dollar. By May of the same year, it had stumbled
to 62 to the U.S. dollar. And as prices went up rapidly, so that by October 1923, it had reached
4.2 trillion to the U.S. dollar! (Bernardo M. Villegas & Victor R. Abola, Economics, An
Introduction [Third Edition]).

As reported, “prices were going up every week, then every day, then every hour. Women were
paid several times a day so that they could rush out and exchange their money for something of
value before what little purchasing power was left dissolved in their hands. Some workers tried
to beat the constantly rising prices by throwing their money out of the windows to their waiting
wives, who would rush to upload the nearly worthless paper. A postage stamp cost millions of
marks and a loaf of bread, billions.” (Sidney Rutberg, “The Money Balloon” New York: Simon
and Schuster, 1975, p. 19, cited in “Economics, An Introduction” by Villegas & Abola, 3rd Ed.)

While FPFC’s voluminous records and statistics proved that there has been a decline in the
purchasing power of the Philippine peso, this downward fall of the currency cannot be
considered “extraordinary.” It is simply a universal trend that has not spared our country.

Article 1251
Payment shall be made in the place designated in the obligation.

There being no express stipulation and if the undertaking is to deliver a determinate thing,
the payment shall be made wherever the thing might be at the moment the obligation was
constituted.

In any other case the place of payment shall be the domicile of the debtor.

If the debtor changes his domiciles in bad faith or after he has incurred in delay, the
additional expenses shall be borne by him.
 These provisions are without prejudice to venue under the Rules of Court.

Ang kabayaran ay dapat gawin sa lugar kung saan itinalaga ang obligasyon.

Na walang nakasaad na stipulasyon at kung ang layunin ay magdala ng bagay, ang kabayaran
ay dapat gawin kung saan ang bagay sa sandaling ang obligasyon ay ginawa.

Sa kahit anong kaso ang lugar ng pagbabayad ay dapat sa tirahan ng nangutang.

Kung ang nagutang ay nagbago ng lugar na tinitirhan sa masamang intension/hangarin o

pagkatapos siyang mahuli sa pagbabayad, ang dagdag na gastos ay maipapataw sa kanya.

Ang probisyon na ito ay walang kinalalaman sa lugar na tinutukoy sa Rules of Court.

Venue of Payment

1. Specific place designated where payment shall be made.

2. If there is no agreement, the following rule shall apply:

a. Delivery of determinate thing – on the place where the thing might be at the time the
obligation was constituted. b. Other
cases (delivery of money, generic thing or to perform a personal obligation) – at the domicile of
the debtor.

Case Illustration: Lucia Gomez, Et. Al. vs. Ng Fat, Et. Al.

Article 1252
He who has various debts of the same kind in favor of one and the same creditor, may
declare at the time of making the payment, to which of them the same must be applied.

Unless the parties so stipulate, or when the application of payment is made by the party for
whose benefit the term has been constituted, application shall not be made as to debts
which are not due.

If the debtor accepts from the creditor a receipt in which an application of payment is
made, the former cannot complain the same, unless there is a cause for invalidating the
contract.

Kapag ang isang tao na may iba’t ibang pagkakautang na may parehong uri, na pumapabor sa
isang nagpautang, ay maaari na sa oras ng pagbabayad, ay sabihin kung alin sa mga utang ang
kabayaran ay in-aplay. Malilban kung napagkasunduan ng partido, o kung ang pagbabayad ay
ginawa ng isang partido na kung saan kung kaninong kapakinangan ang termino ay binuo, ang
aplikasyon ay hindi maaari sa utang na hindi pa dapat bayaran.

Kung ang nangutang ay tinanggap mula sa nagpautang ang resibo na kung saan ang aplikasyon
ng kabayaran ay naisagawa, ang unang nabanggit ay hindi maaaring magreklamo, maliban
kung may kadahilanan upang ipawalang bisa ang kontrata.

Discussion:

Definition of application of payments.

It is the designation of the particular debt being paid by e debtor who has two or more debts or
obligations of the same kind in favor of the same creditor to whom the payment is made.

Right to make application of payments primarily to the debtor.

The debtor has the right to choose which of the several due shall be paid. The right belongs
primarily to the debtor. But, there is a proper time for the designation of the payment. It must be
made at the moment of payment.

The creditor may have the right to apply to which of the several debts the payment was made by
issuing receipts, if the debtor failed to exercise his right. The payment is deemed applied to the
specific indebtedness mentioned in the receipt, if the debtor has accepted the receipt without
objection.

Requisites for a valid application of payments by the debtor.

1. There is only one debtor and one creditor;

2. The debtor owes the creditor two or more debts which are of the same kind or identical specie;
3. All the debts are due and demandable;
4. The payment made by the debtor is not sufficient to cover or settle all the debts.

Requisites for a valid application of payments by the creditor.

1. The debtor did not make any designation on which debt should be paid when he made the
payment;
2. The creditor issued a receipt expressing the application of the payment to a particular debt;
3. The debtor assented to the application of the payment to a particular debt.

Limitation of the preferential right of the debtor to choose the debt to be paid.

1. The debtor cannot apply to a debt not yet liquidated or due;

2. If the creditor is given a benefit of the period or term, which has not yet arrived, an application
of payment cannot be made by the debtor;
3. If there is a specific agreement as to which debts shall be paid first, the debtor cannot vary the
agreement without the consent of the creditor;
4. If there is principal obligation which bears interests, the debtor cannot pay the interest without
first paying the principal;
5. A debtor cannot choose to pay a bigger debt partially, when the payment made can be applied
as full payment to a smaller debt.

Case Illustration: Traders Insurance and Surety Company vs Dy Eng Giok, Pedro Lopez Dee
and Pedro E. Dy-Liacco

Article 1253
If the debt produces interest, payment of the principal shall not be deemed to have been
made until the interests have been covered. (1173)

Kapag ang utang ay nagkaroon na ng tubo, ang kabayaran ng puhunan ay dapat na hindi
tanggapin hanggang ang tubo ay hindi kasama.

Discussion

1) Interest must be paid first – obligatory(2) Effect if payment is credited to the principal –
reduction of principal(3) What interest is supposed to be paid(a) interest by way of
compensation(b) interest by way of damages due to default

Case Illustration: Magdalena State v Antonio& Herminia Rodriguez (JNR)18 Scra 967 Dec
17, 1966

Article 1254
When the payment cannot be applied in accordance with the preceding rules, or if
application can not be inferred from other circumstances, the debt which is most onerous to
 the debtor, among those due, shall be deemed to have been satisfied.If the debts due are of
the same nature and burden, the payment shall be applied to all of them proportionately.
(1174a)

Kung ang kabayaran ay hindi magagamit sa mga naunang batas, o kung ang mga ito ay hindi
maiaangkop sa mga pagkakataon, ang utang na may kalakip na matinding obligasyon ng ang
siyang dapat unahin.At kung sakalit ang mga obligasyon ay nakatakda na at kapareho ang
kahalagahan na naunang obligasyon, ang mga kabayaran ay kasing pantay at tumbas ng
nabanggit.

Article 1255
The debtor may cede or assign his property to his creditors in payment of his debts. This
cession, unless there is stipulation to the contrary, shall only release the debtor from
responsibility for the net proceeds of the thing assigned. The agreements which, on the
effect of the cession, are made between the debtor and his creditors shall be governed by
special laws. (1175a)

Ang nangutang ay maaaring italaga ang kanyang pag-aari sa kanyang inutangan para sa
pagbabayad sa kanyang inutangan ng inutang. Ang pagtatalaga, maliban kung may nasasaad
na kasalungat, ay maari lang na palayain ang nangutang sa kanyang responsibilidad para sa
natitirang halagang bagay na itinalaga. Ang kasunduan na epekto ng pagtatalaga, ay ginawa sa
pagitan ng nangutang at nagpa-utang ay pinamamahalaan ng espesyal na batas.

Discussion:

Payment by Cession is another special form of payment. It is assignment and abandonment of

all the properties of the debtor for the benefit of his creditors in order that the latter may sell the
same and apply the proceeds thereof to the satisfaction of their credits.

Classes of Cession or Assignment:

1. Voluntary or Contractual – cession or assignment by agreement of the parties

2. Involuntary or legal – cession or assignment which is governed by the insolvency law
(Act 1956)

Requisites:

1. There is plurality of debts;

2. Debtor must be partial or completely insolvent;
3. There are at least 2 creditors;
4. There is acceptance of the cession or assignment by the creditors;
5. The property ceded or assigned must not exempt from execution.

Cession or Assignment /vs/ Dation:

1. Object: What is ceded is the universality of debtor’s property excluding those exempted
from execution /vs/ What is delivered is only a particular property considered as an equivalent of
the performance of the obligation;
2. Number of Parties : There is plurality of creditors /vs/ There may be only one creditor
3. Financial Condition of debtor: Debtor is insolvent /vs/ Not necessarily insolvent. dation
payment can take place even when the debtor is solvent
4. Effect: Ownership is not transferred to the creditor /vs/ Ownership is transferred to the
creditor upon delivery
5. Novation: Not an act of novation of the contract /vs/ an act of novation

Case Illustration: Development Bank of the Philippines vs. Court of Appeals and Lydia Cuba

Article 1256
If the creditor to whom tender of payment has been made refuses without just cause to
accept it, the debtor shall be released from responsibility by the consignation of the thing or
sum due.

Consignation alone shall produce the same effect in the following cases:

1. When the creditor is absent or unknown, or does not appear at the place of payment;
2. When he is incapacitated to receive the payment at the time it is due;
3. When, without just cause, he refuses to give a receipt;
4. When two or more persons claim the same right to collect;
5. When the title of obligation has been lost.

Kung ang nagpautang kung saan ang kabayaran ang ginawa at tinanggihan ang walang
kadahilanan na tanggapain ito, ang nangutang ay maaaring pakawalan sa kanyang
responsibilidad sa pamamagitan ng konsignasyon ng mga bagay o kabuuan na dapat bayaran.

Ang konsignasyon ay maaaring maglabas ng parehong epekto sa mga sumusunod na

pangyayari.
1. Kung kailan ang nagpautang ay wala o hindi na Makita, o hindi na Makita sa lugar na
magbabayaran.
2. Kung kailan sya ay walang kakayahan na tumanggap ng bayad kapag dumating na ang
takdang panahon na dapat ng bayaran.
3. Kung kalian, walang dahilan, ay tinanggihan nya na magbigay ng resibo;
4. Kung kalian dalawa o higit pang mga tao ay humahabol ng karapatan na kumolekta;
5. Kung kalian ang titulo ng obligasyon ay nawala.

Rural Bank v. Court of Appeals

While tender generally precedes consignation, consignation may be allowed without prior tender
in certain cases (e.g., if there are considerations of equity as when a prior tender or offer appears
to be useless).

Article 1257
In order that the consignation of the thing due may release the obligor, it must first be
announced to the persons interested in the fulfillment of the obligation.

The consignation shall be ineffectual if it is not made strictly in consonance with the
provision which regulate the payment.

Upang mapalaya ang may utang mula sa consignation ng kanyang pagkakautang,

kinakailangan muna niyang ipaalam ito sa mga taong interesado sa pagtupad ng obligasyon.

Ang consignation ay walang bisa kapag ito ay hindi ginawa sa paraang naaayon sa probisyon
na nag-aayos ng kabayaran.

Discussion:

The purpose of the announcement if to give the creditor the chance to accept the tender of
payment and avoid unnecessary litigation.

The article emphasizes on the fact that consignation must be strictly made in consonance with
the provisions of the law in order for it to be effectual or valid.

Article 1258
 Consignation shall be made by depositing the things due at the disposal of judicial
authority, before whom the tender of payment shall be proved, in a proper case, and the
announcement of the consignation in other cases.

The consignation having been made, the interested parties shall also be notified thereof.

Ang consignation ay mangyayari sa pamamagitan ng pagdeposito sa korte ng bagay na

obligasyong ibigay, at ang korteng ito ay kung saan ang tender of payment ay kailangang
patunayan, sa tamang kaso, at sa paghahayag ng consignation ng iba pang kaso.

Discussion

Distinction Between Tender of Payment and Consignation

Basis Tender of Payment Consignation

It is the principal or consummating act

It is the antecedent of consignation
1. Nature for the extinguishment of the
or preliminary act to consignation.
obligation.

It does not by itself extinguish the It extinguishes the obligation when

2. Effect
obligation. declared valid.

It is judicial for it requires the filing of

3. Character It is extrajudicial.
complaint in court.

Requisites of Consignation:

1. Presence of existing valid debt which is due

2. Presence of prior valid tender of payment
3. Refusal of creditor to accept amount or thing tendered
4. Presence of prior notice of consignation
5. Actual deposit of the amount or thing in court or competent authority
6. Second notice after the making of the deposit is mandatory

Case Illustration:
Limkako vs De Teodoro 47 Phil 313 (1943)

Ponente: J. Ozaeta

Facts:

The Limkakos and David were co-owners of a property in Manila. The Limkakos mortgaged
their property to David who, before her death, donated the mortgage credit to her adopted
daughters, de Teodoro and de Sison. The Limkakos sold their mortgaged property to Sison. De
Teodoro refused to have her mortgage credit payed off, thus the Limkakos consigned the
payment to the office of the clerk of court who, in turn, deposited the check in the Insular
Treasury as fiduciary funds.

The plaintiffs then brought this action to compel the Teodoros to accept the payment.

Issue: Whether or not the consignation is valid?

Held:

Yes.

Under Article 1176 of the Civil Code (now Article 1256 of the New Civil Code), if a creditor to
whom tender of payment has been made should refuse without reason to accept it, the debtor
may relieve himself of liability by the consignation of the thing due. Article 1177 of the Civil
Code (now Article 1257 of the New Civil Code) states that in order that the consignation of the
thing due may release the obligor, previous notice thereof must be given to the persons interested
in the performance of the obligation. And under Article 1178 (now 1258 of the New Civil Code),
consignation shall be made by the delivery of the things due to the court, accompanied by proof
of tender, when required, and of notice of the consignation in other cases. After the consignation
has been made, the persons interested shall also be notified thereof.

There was a tender of payment and a refusal by Mrs. Teodoro due to her preference that she be
the one to purchase the property instead of Sison. The SC ruled that the refusal to accept the
payment was invalid.

The second requisite for consignation to be valid is that the previous notice of the consignation
be made to the person interested in the performance of the obligation. The record of the case is
silent on this point, but no attack on the consignation is made by the defendants.

The third requisite is that after the consignation has been made, the person interested shall also
be notified thereof. This was fulfilled by the service of summons.
The consignation therefore is valid, hence, the Teodoros are required to accept the tendered
payment.

Article 1259
The expense of consignation, when properly made, shall be charged against the creditor.

Ang mga gastos ng consignation, kapag maayos na nagawa, ay maipapataw laban sa

nangutang.

*If the consignation is properly made the filling of the suit must bear the expenses of
consignation like storage fees, filling fees, attorney’s fees and other related expenses.

Case Illustration: Amadeo Matute vs. Cheong Boo

Article 1260
Once the consignation has been duly made, the debtor may ask the judge to order the
cancellation of the obligation.

Before the creditor has accepted the consignation, or before the judicial declaration that
the consignation has been properly made, the debtor may withdraw the thing or the sum
deposited, allowing the obligation to remain in force.

Kapag ang pagkakatiwala ay naisagawa na, ang may utang ay maaaring hilingin sa hukom na
ipag-utos na kanselahin ang obligasyon.

Bago pa man tanggapin ng nagpautang ang pagkakatiwala, o bago pa man ipahayag ng

hukuman na nagawa na ang kasunduan sa pagkakatiwala, ang nangutang ay maaaring bawiin
ang bagay o kabuuan ng kanyang naideposito, pumapayag na ang obligasyon ay manatili pa
rin.

Discussion:

Effect of valid consignation. When the consignation is properly effected, the court will order the
cancellation of the obligation upon motion duly filed by the debtor. When the validity of the
consignation has been affirmed by the court, the consignation shall have a retroactive effect. The
obligation is deemed paid from the moment the amount or the thing due has been actually placed
at the disposal of the court. The running of interest if stipulated is also deemed suspended at the
same time.

Effect of improper consignation. If the consignation is not properly made the obligation stays as
the attempted consignation did not amount to payment.

Effect of dismissal of the consignation case. If the case has been dismissed by the court for any
valid reason the attempted consignation will have no favorable effect upon the debtor.

Withdrawal of the thong or sum deposited, when available. The debtor who made the deposit
may still withdraw the thing or sum of money he had deposited in court provided that:
A. The creditor has not yet accepted the thing or sum deposited;
B. That the court had not yet made a judicial declaration that the consignation had been properly
made.
The reason why debtor may still withdraw the thing deposited is that he still owns the money or
thing deposited at the precise time.
Judicial approval is necessary to render consignation effective and valid. Without judicial
approval, the amount deposited continues to be under the disposition of the debtor. After the
consignation has been approved, the debtor may ask for the cancellation of the obligation.

Case Illustration: Eugenio Bravo vs Ciriano Barreras

Article 1261
If the consignation having been made, the creditor should authorize the debtor to withdraw
the same, he shall lose every preference which he may have over the thing. The co-debtors,
guarantors and sureties shall be released. (1181a)

Kapag nagkamali ang parehong partido at nagdulot ito ng pagkasira ng kanilang kasunduan,
ang kanilang kontrata ay maaaring baguhin.

Case Illustration: San Miguel Brewery vs La Union and Rock Insurance Co (40 Phil. 674)

Article 1262
An obligation which consists in the delivery of a determinate thing shall be extinguished if
it should be lost or destroyed without the fault of the debtor, and before he has incurred in
delay.When by law or stipulation, the obligor is liable even for fortuitous events, the loss of
the thing does not extinguish the obligation, and he shall be responsible for damages. The
same rule applies when the nature of the obligation requires the assumption of risk. (1182a)

Kung sakali’t ang obligasyon ay nauukol sa tukoy na bagay ang mga ito ay mawawalang bisa
kung ito ay nasira ng walang kinalaman ang umutang at hindi lumampas sa takdang panahon
ang kabayaran.Kung sakalit nakasaad sa kasulatan na kahit dumating man ang hindi
inaasahang pangyayari ay kailangan bayaran ang inutang kahit nasira man o mawala ang
kabayaran. Babayaran ng umutang ang bagay na kabayaran kahit anuman ang mangyari.

Article 1263
In an obligation to deliver a generic thing, the loss or destruction of anything of the same
kind does not extinguish the obligation. (n)

Sa obligasyon na ihatid ang isang panlahat (Generic) na uri ng bagay, ang pagkawala o ang
pagkasira ng ano mang magkaka- uri ay hindi tumatapos ng obligasyon.

Discussion:

This Article is based from the principle that “genus never perish” (genus nunguan perit). The
debtor can still be compelled to deliver a thing of the same kind. The creditor, however, cannot
demand a thing superior quality neither that a debtor deliver a thing of inferior quality.

If a generic thing is delimited, that is, where there has been limitation of the generic object to a
particular group of things, the obligation is extinguished by the loss of that particular group from
which the the prestation has to be taken. [ill. Jane, the obligor has committed to deliver half ton
of banana from her lakatan banana tree, but the harvest was damaged by a pest. All the trees
and growing fruits were destroyed. he obligaton is extinguished. In effect when the banana had
been particularized, the object of the obligation become determinate. Their loss extinguishes the
obligation.]

Case Illustration: Bunge Corporation and Universal Commercial Agencies vs. Elena
Camenforte and Company

Article 1264
The courts shall determine whether, under the circumstances, the partial loss of the object
of the obligation is so important as to extinguish the obligation. (n)
Ang Korte ang magsasaalam kung, sa ilalim ng mga pangyayari, ang bahagi na pagkawala ng
bagay ng obligasyon ay mahalaga upang tuluyan na mawala na ang obligasyon.

Illustration:

James is obliged himself to deliver to Jake a specific race horse. The horse met an accident as a
result of which it suffered a broken leg. The injury is permanent. Here, the partial loss is so
important as to extinguish the obligation.

If the loss is due to the fault of James, he shall obliged to pay the value of the horse with
indemnity for damages.

If the horse to be delivered is to be slaughtered by Jake, the injury is clearly not important. Even
if there was fault on the part of James, he can still deliver the horse with liability for damages, if
any, suffered by Jake.

Article 1265
Whenever the thing is lost in the possession of the debtor, it shall be presumed that the loss
was due to his fault, unless there is proof to the contrary, and without prejudice to the
provisions of Article 1165. This presumption does not apply in case of earthquake, flood,
storm, or other natural calamity.

Kapag ang bagay ay nawala sa mga kamay ng may utang, ito ay inaakalang nawala dulot ng
kanyang pagkakamali, maliban na lamang kung may makakapagpatunay sa taliwas nito, nang
hindi nakakapinsala sa probisyon ng Artikulo 1165. Ang sapantahang nabanggit ay hindi
maaaring gamiting sa mga kaso ng lindol, baha, bagyo, o anumang natural na kalamidad.

Discussion:

The presumption that the debtor is at fault if he is in the possession of the thing which got lost is
rebuttable. Thus , the debtor may prove that he was not at fault, but if he incurred delain in the
process or he had promised to deliver the thing to two or more persons with different interests, he
will be liable even if the loss is due to fortuitous events.

Furthermore, presumption does not apply in cases of loss or destruction due to natural calamity
such as earthquake, flood, or storm. In these cases, the debtor is generally not liable due
fortuitous events as discussed in Article 1174 in relation to Article 1262.
Case Illustration: Atlantic Mutual Ins. Co. vs, Macondray & Co., Inc. (112 Phil 502)

Article 1266
The debtor in obligation to do shall also be released when the prestation become legally or
physically impossible without the fault of the obligor.

Ang may obligasyong gumawa ay mapapawala sa kaniyang obligasyon kung ang prestation ay
naging imposible dahil sa legal o pisikal na aspeto, nang walang masasabing kasalanan ang
may obligasyon.

Discussion:

Two kinds of impossibility are tackled in this provision, the legal and physical impossibility.

Legal impossibility arises when the act stipulated to be performed is subsequently prohibited by
law.

Case illustration: Asia Bed Factory vs. Kapok Industrial Workers Union

Article 1267
When the service has become so difficult as to be manifestly beyond the contemplation of
the parties, the obligor may also be released therefrom, in whole or in part.

Kapag ang serbisyo ay naging mahirap upang maipahayag na lampas sa contemplation ng

partido, ang nangutang ay maari rin mapalaya, sa kabuoan o sa bahagi nito.

*This article refers to the difficulty of service or performance manifestly beyond the intention of
the parties.

Case Illustration: Occeña vs. Jabson

Article 1268
When the debt of a thing certain and determinate proceeds from a criminal offense, the
debtor shall not be exempted from the payment of its price, whatever maybe the cause for
the loss, unless the thing having been offered by him to the person who should receive it,
the latter refused without justification to accept it.
Kung ang utang ay bagay na natutukoy o determina ay nagmula sa kasong kriminal, ang
nangutang ay kailangan pa rin magbayad kahit ano pa man ang kadahilanan ng pagkawala ng
bagay na ito. Maliban na lamang kung ibinibigay na ito ng nangutang at hindi ito tinanggap ng
nagpautang ng walang nararapat na pangangatwiran.

Discussion:

The article applies only to an obligation to deliver a certain thing which is determinate, and
which the obligation arose out of the commission of a criminal offense committed by the debtor.
If the thing is lost for whatever reason the debtor shall pay for the value of the thing.

If the obligor had offered or tendered the delivery of the thing to the obligee, but the latter had
unjustifiably refused to accept it, and the thing got lost, the former is not liable anymore because
the latter is in mora accipiendi.

Article 1269
The obligation having been extinguished by the loss of the thing, the creditor shall have all
the rights of action which the debtor may have against third persons by reason of the loss.
(1186)

Kapag pagkakatiwala ang napagkasunduan, ang nagpapautang ang may karapatang bumawi sa
nangutang, maaaring mawala sa kanya ang karapatan sa anumang kagustuhan nya sa bagay na
ito. Ang kanyang mga kasamahang nagpapautang, mga gumagarantiya at mga tagapanagot ay
magiging malaya.

Discussion

Although the obligation is extinguished by los of a thing without the debtors fault, nevertheless,
whatever action the debtor may have against the third person by reason of the loss transferred to
the creditor in order to safeguard the interest of the latter. The right of action includes the
insurance indemnity that may have been received from the third person.

Illustration

Severino obliged himself to deliver to apolinario a specific carabao, without the permissio of
severino, his neighbor, pacifico took the carabao and used the same foe plowing. Later the
carabao was lost through pacifico’s fault. Severino’s obligation was extinguished. But apolinario
acquired the right to file an action against pacifico to recover the price of carabao.

Article 1270
Condonation or remission is essentially gratuitous, and requires the acceptance by the
obligor. It may be made expressly or impliedly.

Ang “condonation” ay isang pagpapatawad ng nagpautang sa umutang ito ay tinataguring

isang pabuya sa isang tao at kinakailangan naman ng pagtanggap ng dapat na siyang
magbayad. Ito ay pwede ipakita sa pamamagitan pahiwatig o pahayag.

Article 1271
The delivery of a private document evidencing a credit, made voluntarily by the creditor to
the debtor, implies the renunciation of the action which the former had against the latter.

If in order to nullify this waiver it should be claimed to be inofficious, the debtor and his
heirs may uphold it by proving that the delivery of the document was made in virtue of
payment of the debt. (1188)

Ang paghahatid o pagdadala ng pribadong dokumento na nagpapatunay sa isang pagkakautang

na ginawang boluntaryo ng nagpautang sa nangutang, ay pinababatid ng pagtatakwil ng
karapatan ng mga ginawa ng nangutang sa kanya.

Kung para maipawalang bisa ang pagtatakwil ng karapatan kailangang angkinin na inofficious
ito, ang nangutang at ang kanyang tagapagmana ay maaaring sang-ayunan ito sa pamamagtan
ng pagbibigay na ang inihatid na dokumento ay ginawa sa kabutihan ng pagbabayad ng utang.

Discussion:

Presumption in case of voluntary delivery of indebtedness by creditor:

1)Pressumption of implied remission – the article gives an example of implied or tacit remission.
If the debt is not yet paid, the creditor would need the document to enforce payment. In case he
voluntarily delivers it to he debtor, the only logical interference is that he is renouncing his right.

2)Contrary Evidence – The pressumption is prima facieor rebuttable by contrary evidence.

Evidence is admissible to show otherwise, as when a receipt signed by the creditor was delivered
only for examination by the debtor client (lawyer) of the amount of attorney’s fee to be paid by
the latter.

3)Extent of remission – If the obligation is joint, the pressumption of remission partains only to
the share of the debtor who is in possession of the document; if solidary, to the total obligation.
4)Presumption applicable only to private document – Article 1271 speaks of a private document.
The legal presumption of remission does not apply in the case of a public document because it
is easy to obtain a copy of the same, being a public record

Under second paragraph of Article 1271, the renunciation of the action which the creditor had
against the debtor maybe nullified or invalidate by showing that the waiver is inofficious. In
other words the remission becomes null and void upon proof that it is inofficious.

The debtor and his heirs may prove that the delivery of the document was really made in virtue
of payment of the debt and not remission.

**no case cited

Article 1272
Whenever the private document in which the debt appears is found in the possession of the
debtor, it shall be presumed that the creditor delivered it voluntarily, unless the contrary is
proved. (1189)

Kung sakaling ang pribadong dokumento na kung saan na ang utang ay nakita at natagpuan sa
pangangalaga ng nangutang, nandoon ang pag-aakala na ang nagpautang ay dinala nya ito ng
kusang loob, maliban na lamang na ito ay nagpapatunay na sumasalungat.

Example:

Kristine owe Karen P20,000.00 evidenced by a promissory note. The note, signed by Kristine, is
given to Karen.

If the promissory note is voluntary delivered to Kristine, the presumption is that the debt must
have been remitted by Kristine.

If it is known that Kristine has not yet paid Karen, it must be presumed that the obligation has
been remitted by Karen.

Suppose it is not known how Kristine came into possession of the promissory note. The
presumption is that it was voluntarily delivered by Karen, unless Karen proves the contrary. (Art.
1272)

Remission is an act of liberality by virtue of which the obligee, without receiving any price or
equivalent, renounces the enforcement of the obligation, as a result of which it is extinguished in
its entirety or in that part or aspect of the same to which the remission refers.
Case Illustration: Lopez Vito vs Tambunting

Article 1273
The renunciation of the principal debt shall extinguish the accessory obligations; but the
waiver of the latter shall leave the former in force.

Ang pagtatakwil ng kabayaran sa prinsipal na utang ay makakapagpawalang bisa sa

obligasyong aksesoryal. Ngunit ang pag-waive ng obligasyong aksesoryal ay hindi
nangangahulugang wala nang bisa ang prinsipal na utang.

Discussion:

The accessory obligation is extinguished once the principal debt is remitted, because the
existence of the accessory obligation is dependent upon the existence of the principal obligation.

On the other hand, if the accessory obligation alone is extinguished, the principal obligation
remains, because the existence of the principal obligation is not dependent upon the accessory
obligation.

Illustrations:

Remission of principal debt, effect on accessory obligation

Pedro borrowed money from Juan, Maria guaranteed the payment of the loan. Juan remitted the
entire obligation of Pedro. THis remission extinguishes the whole obligation.

Remission of the accessory Obligation

Pedro borrowed money from Juan. To secure the loan, Maria was convinced to mortgage his
property to Juan. If Juan released the mortgage by remission, Maria’s property is freed from the
obligation. But the principal obligation of Pedro which is the loan, shalll remain without any
collateral or security.

Article 1274
It is presumed that the accessory obligation of pledge has been remitted when the thing
pledged, after its delivery to the creditor, is found in the possession of the debtor, or of a
third person who owns the thing.
Maipapalagay na ang acessory obligation ng isang pledge ay naibalik kung, pagkatapos itong
ibigay sa inutangan, ito ay nasa poder ng nangutan, o sa taong nagmamay-ari nito.

Discussion:

Pledge is a contract by virtue of which the debtor delivers to the creditor or to a third
person a movable, or document evidencing incorporeal rights, for the purpose of securing
the fulfillment of a principal obligation with the understanding that when the
obligation is fulfilled, the thing delivered shall be returned with all its fruits and
accessions.

If the pledge was found in the possession of the debtor, or of the third person who owns the
thing, the presumption is that the pledge, as an accessory obligation, has been remitted. However,
this presumption can be rebutted by the creditor if he proves that the thing is stolen, returned for
repairs, etc., in which case, there shall be no remission.

Remission is an act of liberty, by virtue of which the obligee, without receiving any price or
equivalent renounces the enforcement of the obligation, as a result of which it is extinguished in
its entirety or in that part or aspect of the same to which the remission refers. Simply put, it is the
gratuitous abandonment by the creditor of his right.

Illustration:

Jay and Zola are friends. Jay borrowed money from Zola. However, Zola’s wife is stingy. To
appease his wife,Jay and Zola made a written contract stipulating that Jay’s motorcycle will be
used by Zola until the money borrowed is returned, which Zola presented to his wife. His wife
allowed Zola to lend Jay the money and the motorcycle was delivered to Zola. However, since
they are friends, Zola let Jay borrow the motorcycle often, until the time that the motorcycle was
exclusively used by Jay. It is therefore presumed that the motorcycle is remitted until Zola rebuts
such presumption.

Article 1275
The obligation is extinguished from the time the characters of creditor and debtor are
merged in the same person.

Ang obligasyon ay mawawala simula sa oras na kung saan ang character ng nagpautang at ng
nangutang ay nagsama sa isang tao.

Dicussion:

Requisites for Confusion or Merger of Right

1. There is a merger in the same person of the characters of a creditor and a debtor.

2. The merger must be in the characters of a principal creditor and a principal debtor.

3. The merger is definite and complete. Partial merger is allowed. It is definite and complete
up to the extent of the concurrent amount or value.

Case Illustration: Yek Tong Lin Fire and Marine Insurance Co. vs. Pelagio Yusingco, ET AL.

Article 1276
Merger which takes place in the person of the principal debtor or creditor benefits the
guarantors. Confusion which takes place in the person of any of the latter does not
extinguish the obligation.

Ang pag-iisa o pagsasanib ng prinsipal na nangutang at nagpautang ay ika-papakinabang ng

tagapanagot. Ang pag-iisa o pagsasanib ng tagapanagot ay hindi maaaring makapagpa-walang
bisa o makapag-wala ng obligasyon.

Discussion:

Two kinds of merger:

1. Merger in the person of the principal debtor or principal creditor;

2. Merger in the person of the guarantor.

The first merger results in the extinguishment of the guaranty because the latter is just an
accessory obligation. When the principal obligation is extinguished, the accessory obligation is
also extinguished. Thus, the law says, the confusion benefits the guarantor.

The second merger will not extinguish the principal obligation because the efficacy of the
principal obligation is not dependent upon the accessory obligation.

Article 1277
Confusion does not extinguish a joint obligation except as regards the share corresponding
to the creditor or debtor in whom the two characters concur. (1194)

Hindi mapapawalang bisa ang joint obligation ng pagsasanib ng karakter ng nagpautang at

umutang, maliban sa mga bahagi na may pag-aari o na napataw sa mga karakter na ito.

DISCUSSION
Joint Obligation, Concept; Distinguished From Solidary Obligation

In joint obligation there are two or more debtors or creditors, where debtor is liable for a
proportion of debt and creditor is entitled to a part of a credit.

ILLUSTRATION:

Rara and Debi owed P 2 M from Frank. Rara and Debi had an agreement that Rara will pay the
whole P 2 M to Frank. That extinguishes Debi’s obligation to Frank. However, Debi will be
liable to pay P 1 M To Rara.

Article 1278
Compensation shall take place when two persons, in their own right, are creditors and
debtors of each other. (1195)

Ang kabayaran ay mangyayari sa dalawang tao ayon sa kanilang mga karapatan kung sino ang
nagpautang at sino ang umutang.

Article 1279
In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;

(2) That both debts consist in a sum of money, or if the things due are consumable, they be
of the same kind, and also of the same quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;

 (5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor. (1196)

Para ang kompensasyon ay nararapat, dpat ito ay :

Upang maging wasto ang compensation, kinakailangan na:

(1) Bawat isa sa mga may utang ay obligado principally, at na siya din ang principal creditor
nung isa;

(2) Kung ang parehong utang ay binubuo ng kabuuan ng pera, o ang bagay na dapat ibigay ay
inilaan upang gamitin, na pareho sila ng uri, at pareho din sila ng kalidad kung ang nahuli ay
nakasaad;

(3) Kung ang dalawang utang ay dapat nang bayaran;

(4) Na ito ay liquidated at hinihingi

(5) Na wala sinuman sa mga ito mayroong anumang mga pagpapanatili o kontrobersya, na
nagsimula sa pamamagitan ng ikatlong tao at nakipag-ugnayan sa angkop na panahon sa may
utang. (1196)

Discussion:

Article 1270 enumerates the requirements or requisites for legal compensation as follows:

1. “That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other” – that parties be mutual creditor and debtor of each other and
their relatonship is a principal one, that is, they are principal debtor and creditor of each other.
2. “That both debts consist in a sum of money, or the thing due are consumable, they be of
the same kind, and also of the same quality if the latter has been stated”. – When the debts
consist of a money, there is not much of a problem when it comes to compensation to the
concurrent amount. It is a matter of mathematical computation.
3. “That the 2 debts are due” – Thelaw does not require that the parties obligations be
incurred at the same time, what the law requires only is that the obligations be due and
demandable at the same time.
4. “That they be liquidated and demandable” – A debt is considered liquidated when its
amount is clearly fixed. It is unliquidated when the amount is not fixed because it is still subject
to a dispute or to a certain condition
5. “That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due to the debtor” – A debt or a thing cannot be subject of
compensation if the same had been the subject of a garnishment of which the debtor was timely
notified. When a credit or property had been properly garnished or attached, it is placed under
a custodia legis. this means it cannot be disposed of without the approval of the court.
Consequently, compensation cannot operate because a third party is already involved whose
claim will be determined by the court

Case Illustration: Metropolitan Bank and Trust Company vs. Joaquin Tonda and Ma. Cristina
Tonda

Article 1280

Notwithstanding the provisions of the preceding article, the guarantor may set up
compensation as regards what the creditor may owe the principal debtor. (1197)

Bagaman ang probisyon ng nauuna na artikulo, ang tagapanagot ay maaaring mag lagay ng
sahod/bayad na magpalagay kung ang nagpautang kung may utang sa pangunahing nangutang.

Article 1281
Compensation may be total or partial. When the two debts are of the same amount, there
is a total compensation.

Ang kabayaran ay maaaring buo o bahagya. Kapag ang dalawang utang ay pareho ng halaga,
ang kabayaran ay buo.

Illustrations:

Total Compensation

Juan and Pedro are good friends. One day, Juan borrowed P100 from Pedro to buy some
groceries. The following day, while they were eating at a restaurant, Pedro realized he left his
wallet in the car and borrowed P100 from Juan.
Juan and Pedro became both debtors and creditors. Since their debts are of the same amount
(P100), the compensation is total.

Partial Compensation

Juan and Pedro are good friends. One day, Juan borrowed P100 from Pedro to buy some
groceries. The following day, while they were eating at a restaurant, Pedro realized he left his
wallet in the car and borrowed P80 from Juan.

Juan and Pedro became both debtors and creditors. Since their debts are not of the same amount
(P100), the compensation is partial. The balance of P20 remains an obligation.

Article 1282
The parties may agree upon the compensation of debts which are not yet due.

Ang mga partido ay maaring magkasundo sa kompesasyon ng utang na hindi pa kailangang

bayaran.

Discussion:

As a general rule, compensation becomes effective when both mutual debts are due. This
provision is an exception to the rule.

Case Illustration: Traders Royal Bank vs. Norberto Castañares and Milagros Castañares

Article 1283
If one of the parties to a suit over an obligation has a claim for damages against the other,
the former may set it off by proving his right to said damages and the amount thereof.

Kung ang isa sa mga partido sa suit over sa obligasyon ay nagsad ng danyos/pinsala laban sa
iba, maari nya itong ipatigil sa pamamagitan ng pagpapatunay ng kanyang karapatan sa
nasabing danyos/pinsala at ang halaga nito.

Difference between Compensation and Set-off or Counterclaim

Compensation – take place by mere operation of law and extinguishes reciprocally the two
debts as soon as they exist simultaneously, while
Set-off or Counterclaim – must be pleaded to be effectual.

Case Illustration: Yap Unki vs. Chua Jamco

Article 1284
When one or both debts are rescissible or voidable, they may be compensated against each
other before they are judicially rescinded or avoided.

Kapag ang isa o parehong mga utang ay maaaring ikansela o ipawalang bisa, maaari nilang
bayaran ang bawat isa bago pa man ito ipawalang bisa o kanselahin ng hukuman. (n)

Discussion:

Before rescissible or voidable debts are judicially rescinded or annulled, they are valid debts. The
parties may opt not to rescind or annul them. Consequently, until they shall have been judicially
declared void, they can be compensated against each other.

If the prescriptive period for the rescission or annulment of the debts had already lapsed, there is
automatic compensation and the same will not disturbed anymore.

In other cases, if the debt is rescinded or annulled, the compensation is also automatically
cancelled and there shall be restitution of what each party had received before the rescission or
annulment.

Article 1285
The debtor who has consented to the assignment of rights made by a creditor in favor of a
third person, cannot set up against the assignee the compensation which would pertain to
him against the assignor, unless the assignor was notified by the debtor at the time he gave
his consent, that he reserved his right to the compensation.

If the creditor communicated the cession to him but the debtor did not consent thereto, the
latter may set up the compensation of debts previous to the cession, but not of subsequent
ones.

If the assignment is made without the knowledge of the debtor, he may set up the
compensation of all credits prior to the same and also later ones until he had knowledge of
the assignment. (1198a)
Ang may utang na pumayag sa pagtatalaga ng mga karapatan na ginawa ng isang
pinagkakautangan na pabor sa isang ikatlong tao, ay hindi maaaring mag-set up ng
compensation laban sa assignee na maaaring tumukoy sa kanya laban sa assignor, maliban
kung ang assignor ay naabisuhan ng may utang sa panahon na ibinigay niya ang kanyang
pahintulot, na inereserba niya ang kanyang karapatan sa compensation.

Kung ang pinagkakautangan nakipagkomunikasyon sa kanya tungkol sa cession ngunit ang may
utang ay hindi sumasang-ayon, ang may utang ay maaaring mag set up ng compensation ng
mga utang na nauna sa cession, ngunit hindi sa kasunod na mga bago

Kung ang pagtatalaga ay ginawa nang hindi alam ng may utang, maaari niyang i-set up ng
lahat ng mga credit bago ang parehong nauna at sa iba pang susunod hanggang sa siya ay
magkaroon ng kaalaman tungkol sa pagtatalaga. (1198a)

Illustration:

Tina owes Ralph php 5000, Ralph in turn owes Tina 3000. at maturity the two debts are unpaid,
subsequently Ralph with the consent of tina, assign his Credit Franco.Can Franco collect from
tina the whole amount of p5000? yes because tina cannot set up the defense of compensation as
to the 3000 by reason of consent to the assignment. supposing tina reserve her right to
compensation when pulido makes assignment to franco, can tina put up the defense of
compensation with respect to the php 3000? yes, she can compelled to pay only 3000.

Article 1286
Compensation takes place by operation of law, even though the debts may be payable at
different places, but there shall be an indemnity for expenses of exchange or transportation
to the place of payment. (1199a)

Ang kabayaran ay nangyayari sa pamagitan ng batas kahit na ito ay bayaran sa ibang lugar
ngunit kinakailangan magkaroon ng kabayaran ang pagdadala nito sa ibang lugarbilang
kabayaran sa transportasyon.

Illustration:

Si Pedro na taga Sta. Maria, Laguna ay may umutang kay Juan na taga Siniloan ng halagang
sampung libong piso ngunit dahilan sa nawalan siya ng pambayad sa takdang panahon sinabi ni
Pedro kay Juan na kabayo na lang ang ibabayad niya. Si Pedro bilang siyang umutang ang siyang
magbabayad ng upa sa taong magdadala sa Sta Maria ng kabayo.

Article 1287
Compensation shall not be proper when one of the debts arises from a depositum or from
the obligations of a depositary or of a bailee in commodatum.

Neither can compensation be set up against a creditor who has a claim for support due by
gratuitous title, without prejudice to the provisions of paragraph 2 of Article 301. (1200a)

Ang kompensasyon ay hindi tama kung ang isa sa utang ay nagmula sa depositum o mula sa
obligasyon ng ng depositarya or ng bailee in commodatum.

Hindi rin maaari na ang kompensasyon ay ayusin laban sa isang inutangan na may karapatan
para sa suportang angkop dahil sa gratuitous na titulo, nang walang pagkiling sa mga
probisyon ng talata 2 ng Artikulo 301. (1200a)

Compensation not allowed by Law:

1)Where one the debts arises from a depositum – A deposit is constituted from the moment a
person receives a thing belonging to another with the obligation of safety keeping it and
returning the same (Art 1962)

Article 1287 uses the “depositum instead of “deposit” which is used for an ordinary bank
deposit. Abank deposit is not a depositum as defined above. It is really a loan which creates the
relationship of debtor and creditor. A bank’s failure to honor adepositof money is failure to pay
its obligationas debtor and not a breach of trust arising from depositary’s failure to return the
thing deposited.

2)Where one of the debts arises from a commadatum (is a gratuitous contract whereby of the
parties delivers to another soemthing not consumable so that the latter may use for a certain time
and return it. Art 1933)

3)Where one of the debt arises from a claim for support due by gratuitous title. – “Support
comprises everything that is indespensable for sustenance, dwelling, clothing, medical
attendance, education and transportation, in keeping with the financial capacity of the family
xxx” (Art 194, family Code)

4)”Where one of the debts consists in civil liability arising from a penal offense” – “If one of the
debts consist in civil liability arising from a criminal offense, compensation would be improper
and inadvisable because the satisfaction of such obligation is imperative.” (Report of the Code
Commission, p. 134)

Case Illustration: Paulino Gullas vs. The Philippine National Bank

Article 1288
Neither shall there be compensation if one of the debts consists in civil liability arising from
a penal offense. (n)

Alinma’y hindi ay maaaring mayroong sahod kung isa sa mga utang ay may nilalaman na sibil
na pananagutan na maaaring magkaroon ng penal na kasalanan.

Discussion:

1. Non-Compensation if One Debt Arises from a Crime

Reason for the provision:

“If one of the debts consist in civil liability arising from a penal offense, compensation would
be improper and inadvisable because the satisfaction of such obligaton is imperative.” (Report of
the Code Commission, p. 134)

2. But Victim Can Claim Compensation

It is clear that the criminal cannot claim compensation.

How about the victim?

He should be allowed. Justice J.B.L. Reyes says: “This should be specifically limited to the
accused to prevent his escaping liability by pleading prior credits against the offended party. But
not to the victim of a crime who happens to indebted to the accused.” (observation on the new
Civil Code, Justice J.B.L. Reyes, Lawyer’s Journal, Jan. 31, 1951).

(This is again another instance of FACULTATIVE COMPENSATION.)

Article 1289
 If a person should have against him several debts which are susceptible of (sic)
compensation, the rules on the application of payments shall apply to the order of the
compensation. (1201)

Kung ang tao ay may maraming utang na bayarin na sakop ng compensation, ang patakaran
para sa aplikasyon ng kabayaran ay gagamitin na naaayon sa pagkakasunuran ng
compensation.

Discussion:

Article 1289 is applicable to a debtor who have several debts to one creditor, and vice versa.
Under such circumstances, Articles 1252 to 1254 (on application of payments) shall apply.

Article 1290
When all the requisites mentioned in Art. 1279 are present, compensation takes effect by
operation of law, and extinguishes both debts to the concurrent amount, even though the
creditors and debtors are not aware of the compensation.

Kung lahat ng kailangan na naisaad sa Artikulo 1279 ay naroon, ang kompesasyon ay

magkakaroon ng bisa dahil sa batas, at buburahin ang utang ng magkabilang partido, kahit na
ang mga nangutang at nagpautang ay hindi batid ang kompesasyon.

Discussion:

This provision talks about the moment compensation takes effect in legal compensation. In
contrast to voluntary compensation where compensation takes effect from the time agreed upon
by the parties, or judicial compensation where compensation takes effect from the moment
judgement becomes final and executory, legal compensation takes effect only when the following
requisites are present:

1. Each one of the obligors are bound principally, and that the obligors are at the same time
creditors of each other.
2. Both debts consists in a sum of money, or if the things due are consumable, they are of
the same kind, and also of the same quality if the latter has been stated.
3. That both debts are due.
4. That both debts are liquidated and demandable.
5. That both debts are not subject retention or controversy commenced by third parties and
communicated in due time to the debtor.
Case Illustration:

BPI vs CA G.R. No. 116792 (1996)

Ponente: J. Puno

Facts:

Edvin Reyes opened two joint savings accounts at the Bank of the Philippine Islands, one with
his wife and the other with his grandmother, where he regularly deposited the U.S. Treasury
Warrants payable to the order of his grandmother as her monthly pension.

Three days prior to the grandmother’s death, a check was sent by the U.S. Treasury. When it was
sent to the U.S. for clearing, the treasury dishonored it as it was discovered that the grandmother
died 3 days prior to its issuance. The BPI then contacted Reyes, and he gave verbal authorization
to debit it from his account.

Thereafter, however, Reyes demanded from the bank the reinstitution of the debited amount, in a
suit for Damages filed before the RTC of Quezon City, Branch 79. BPI counterclaimed for moral
and exemplary damages. The court dismissed the case for lack of cause of action. On appeal,
however, the Court of Appeals reversed the decision. Hence, this petition seeking a review of the
decision.

Issue: Whether or not compensation must be made by BPI.

Held:

No.

Compensation shall take place when two persons, in their own right, are creditors and debtors of
each other. Article 1290 of the New Civil Code provides that “When all the requisites mentioned
in Art. 1279 are present, compensation takes effect by operation of law, and extinguishes both
debts to the concurrent amount, even though the creditors and debtors are not aware of the
compensation.” Legal compensation operates even against the will of the interested parties even
without the consent of them. Since the compensation takes place ipso jure, its effect arise on the
very day on which all its requisites concur. When used as a defense, it retroacts to the date when
its requisites are fulfilled.

Article 1279 stats that in order that compensation may be proper, it is necessary:
1. That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
2. That both debts consist in a sum of money, or if the things due are consumable, they be of
the same kind, and also of the same quality if the latter has been stated;
3. That the two debts be due;
4. That they be liquidated and demandable;
5. That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.

The elements of legal compensation are all present in the case at bar. The obligors bound
principally are at the same time creditors of each other. BPI stands as debtor of Reyes, a
depositor. At the same time, BPI is the creditor of Reyes with respect to the dishonored U.S.
Treasury Warrant which Reyes illegally transferred to his joint account. The debts involved
consist of a sum of money. They are due, liquidated, and demandable. They are not claimed by a
third person.

Article 1291
Obligations may be modified by:

1. Changing their object or principal conditions;

2. Substituting the person of the debtor;
3. Subrogating a third person in the rights of the creditor.

Ang obligasyon ay maaring mabago ng:

1. Pagbabago ng bagay o ng pangunahing kondisyon;

2. Paglilipat ng tao ng nangutang;
3. Pagpapalit ng ikatatlong tao sa karapatan ng nagutang.

Discussion:

Kinds of Novation

A . As to their essence:

1. Objective or Real novation – effected by changing the object or principal conditions of the
obligation.
2. Subjective or Personal novation – effected by:

a. Objective or Real novation – effected by changing the object or principal conditions of the
obligation.

b. Subjective or Personal novation – effected by:

b1. Substituting the person of the debtor (passive novation) or

b2. Subrogating a third person to the rights of the creditor. (active novation)

3. Mixed novation – arises when there is a combination of the objective and subjective
novations.

B. As to the form of their constitution:

1. Express- when the parties declared in unequivocal terms that the old obligation is extinguished
by the new obligation.

2. Implied – when there are no express declaration that the old obligation is extinguished by the
new one.

C. As to the extent of their effects:

1. Total or Extinctive – when the original obligation is completely extinguished. There is no

novation when the new contract is not between the same parties as in the old contract.

Four (4) requisites of Extinctive Novation

1. The existence of a previous valid obligation;

2. The agreement of all the parties to the new contract;

3. The extinguishment of the old obligation or contract; and,

4. The validity of new one.

2. Partial or Modificatory – when the original obligation is not totally extinguished but merely
modified.

D. As to their origin:

1. Legal Novation – takes place by operation of law.

2. Conventional Novation – takes place by agreement of the parties.

E. As to presence or absence of condition:

1. Pure – when the creation of new obligation is not subject to any condition.

2. Conditional – when the creation of new obligation is subject to a condition.

Case Illustration: Carlos Sandico,Sr. and Teopisto Timbol vs. The Honorable Minerva
Inocencio Piguing and Desiderio Paras

Article 1292
In order that an obligation may be extinguished by another which substitute the same, it is
imperative that it be so declared in unequivocal (hindi malinaw) terms, or that the old and
the new obligations be on every point incompatible with each other.

Upang ang isang obligasyon ay maaaring matapos sa na papalit sa pareho, ito ay hindi
maiiwasan na ito ay ipinahayag sa madaling termino, o na ang luma at bagong mga obligasyon
maging sa bawat punto na hindi tugma sa bawat isa. (1204)

Article 1293
Novation which consists in substituting a new debtor in the place of the original one, may
be made even without the knowledge or against the will of the latter, but not without the
consent of the creditor. Payment by the new debtor gives him the rights mentioned in
Articles 1236 and 1237. (1205a)

Ang novation na binubuo ng pagpapalit ng bagong may utang sa katayuan ng orihinal, ay

maaaring gawin kahit na hindi alam o labag sa loob ng huli, ngunit hindi nang walang
pahintulot ng pinagkakautangan. Ang pagbabayad ng bagong may utang ay nagbibigay sa
kanya ng mga karapatan na nabanggit sa Artikulo 1236 at 1237. (1205a)

Case Illustration: Magdalena State v Antonio& Herminia Rodriguez (Art 1293-JNR)

Article 1294
If the substitution is without the knowledge or against the will of the debtor, the new
debtor’s insolvency or non-fulfillment of the obligations shall not give rise to any liability
on the part of the original debtor. (n)

Kung ang kapalit ng obligasyon ay nangyari na wala sa kaalaman ng umutang o salungat sa

kagustuhan ng umutang, ang di pagbabayad ng bagong umutang ay hindi pagsisimulan ng isang
pananagutan ng dating umutang.

Illustration:

A loaned to B in the amount of 5 thousand pesos, C who is related to A by affinity added a loan
of 5 thousand without the knowledge and affirmation of A. The loan of C to B should not affect
the loan of A to B. It is C who is liable to B for his additional loan of 5 thousand pesos.

Article 1295
The insolvency of the new debtor, who has been proposed by the original debtor and
accepted by the creditor, shall not revive the action of the latter against the original obligor,
except when said insolvency was already existing and of public knowledge, or known to the
debtor, when the delegated his debt. (1206a)

Ang kawalan ng pambayad ng bagong may utang na iminungkahi ng orihinal na may utang at
tinanggap ng nagpautang , ay hindi buhayin ang ginawa ng nagpautang laban sa orihinal na
may utang, maliban kung ang nasabing kawalan ng pambayad ay umiiral na at alam na ng
publiko, o kaya ay alam na ng may utang nuong itinalaga nya ang kanyang utang.

Discussion:

This article applies only to delegacion – where the substitution of the old debtor is upon the
proposal of the old debtor himself (delegante) and the proposal was accepted by the new debtor
(delegado) and the creditor (delegatario)

If the new debtor , who has been accepted by the creditor, happens to be insolvent and cannot
fulfill the obligation delegated to him, the original debtor is no longer liable anymore for the
payment of the obligation.

Exceptions:
1)If the insolvency was already existing and is of public knowledge when the debt was delegated
to the new debtor ; or

2)If the insolvency of the new debtor was already existing and known to the original original
debtor at the time of the delegation of the debt to the new debtor (Art 1295)

Circumstances Which Do Not Give Rise to Novation by Delegacion:

1)When the third person acted merely as surety or guarantor for the original debtor

2)When the third person is merey an agent of the debtor;

3)When the new debtor merely agreed to assume a joint responsibility for the obligation. The
delegacion is only with the reference to the proportionate share

Case Illustration: Manuel Rios and Paciencia Reyes vs. Jacinto Palma Y. Hermanos, S.C.,
Rafael Palma, and Perfecto Jacinto

Article 1296
Article.1296 When the principal obligation is extinguished in consequence of a novation,
accessory obligations may subsist only insofar as they may benefit third persons who did not
give their consent. (1207)

Kung ang pangunahing obligasyon ay tuluyan ng nawala bunga ng nobasyon, ang mga dagdag
sa obligasyon ay maaaring magpatuloy lamang kung gaano na ang maaring pakinabangan ng
mga taong na kung saan ay hindi nila binigay ang kanilang pahintulot.

Article 1297
If the new obligation is void, the original one shall subsist, unless the parties intended that
the former relations should be extinguished in any event.

Kung ang bagong obligasyon ay walang bisa, ang orihinal obligasyon ang syang magpapatuloy,
maliban na lamang kung ang bawat partido ay ninais na ang naunang relasyon ay tatapusin ng
anumang kaganapan.

Discussion:
Two-fold Purpose of Novation:

1.) To extinguish an old obligation

2.) To create a new one to substitute for the old one

If the new obligation is void, there is no new obligation to supersede the old one.

Exception: If there is an agreement between the parties that even if the new obligation is invalid,
the old obligation shall still be extinguished in any, event, then the said obligation shall be
extinguished. This is equivalent to waiver or remission of the obligation.

Effect of a new obligation which is merely voidable:

When the new obligation is voidable — meaning it remains to be valid and binding until it is
annulled, then the old obligation is novated. However, if the new obligation is annulled, the old
obligation shall subsist and the novation shall be set aside.

Case Illustration: Bert Osmena & Associates, petitioners vs. Court of Appeals and Sps. Pedro
Quimbo and Leonadiza Quimbo, respondents

Article 1298
The novation is void if the original obligation was void, except when annulment may be
claimed only by the debtor, or when ratification validates acts which are voidable.

Ang novation ay walang bisa kung ang orihinal na obligasyon ay walang bisa, maliban lamang
kung ito ay ipapawalang bisa ng nangutang, o kung ang pagpapatibay ay gagawing may bisa
ang mga gawang voidable.

Discussion:

(Note: This provision is contradictory. As a solution, it should be interpreted whereby the first
portion applies to void obligations while the second applies to voidable obligations.)

If the old obligation is void, the new obligation shall also be void since a void contract or
obligation does not exist and it is not subject to ratification. If the obligation is voidable, the new
obligation is valid and binding upon the parties until it is annulled. Before it is annulled, it can
novate the old valid obligation.
Prescribed debts can be the cause or consideration for a new obligation in novation.

Case Illustration:

Villarroel vs Estrada 71 Phil 140 (1940)

Ponente: J. Avanceña

Facts:

The mother of the John Villarroel owed money from the spouses Estrada in the amount of P1,000
payable after 7 years. When the spouses Estrada died, leaving as sole heir Bernandino Estrada,
Villaroel was made to sign a document regarding the debt. Estrada then instituted an action to
recover the P1,000 debt. The CFO of Laguna decided in favor of Estrada, condemning Villarroel
to pay the full amount with legal interest of 12% per year. Villaroel appealed.

Issue: Whether or not, even if the original debt has already prescribed, Estrada still has the right
to recover.

Held:

Yes.

As a general rule, if the debt has already prescribed, it can no longer be recovered. However, in
the case at bar, there was a novation by the parties, whereby Villarroel agreed to assume the
fulfillment of the obligation. As a prescribed debt constitutes a moral or natural obligation as
such, it can be the cause or consideration for a new obligation in novation. Prescription must be
set up as a defense by the debtor in the complaint against him if he does not want to be bound
anymore under the obligation. Otherwise, the obligation shall continue to subsist. The failure to
put up prescription as a defense is equivalent to waiver.

In the case at bar, there was already a novation when Villarroel agreed to resume the obligation
of his mother in law. Hence, he can no longer put up prescription as a defense.

Article 1299
 If the original obligation was subject to a suspensive or resolutory condition, the new
obligation shall be under the same condition, unless it is otherwise stipulated.

Kapag ang orihinal na obligasyon ay subject sa suspensive o sa resolutory na kondisyon, ang

bagong obligasyon ay dapat nakailalim sa parehong kondisyon, maliban kung ito ay stipulated.

*When we say subject to suspensive condition, it will give rise to the obligation while in the
resolutory condition it will extinguished the obligation.

Case Illustration: U.S vs. Francisco Bautista, Et. Al.

Article 1300
Subrogation of a third person in the rights of the creditor is either legal or conventional.
The former is not presumed, except in cases expressly mentioned in this Code; the latter
must be clearly established in order that it may take effect.

Ang subrogation ng ikatlong tao sa mga karapatan ng nagpautang ay maaaring legal o

konbensyonal. Ang nauna ay hindi ipinapagpalagay, maliban sa mga kaso na malinaw na
nabanggit sa Code na ito; ang nahuli ay dapat na malinaw na itinatag upang ito ay
magkabisa. (1209a)

Subrogation is the active subjective novation characterized by the transfer to a third person of all
the rights pertaining to the creditor in the transaction concerned including the right to proceed
against the guarantors or possessor of mortgages, and similar other subject to any applicable
legal provisions or any stipulation agreed upon by the parties in conventional subrogation.

It is the transfer of the credit of the creditor arising in a transaction, to a third person with all the
rights appertaining thereto, either against the debtor or against third persons.

Subrogation is designed to promote and accomplish justice and is the mode which equity adopts
to compel the ultimate payment of a debt by one who in justice and good conscience ought to
pay.

Kinds of subrogation (or Active Subject Novation)

As to their creation

1. Legal subrogation
2. Voluntary or conventional subrogation
 As to their extent

1. Total subrogation
2. Partial subrogation

Legal subrogation is not presumed except in the cases mentioned in the law. Voluntary
subrogation must be clearly established with sufficient evidence, otherwise, its existence will not
be sustained.

Article 1301
Conventional subrogation of a third person requires the consent of the original parties and
of the third person. (n)

Ang conventional na subrogation ng ikatlong tao ay kaylangan magbigay ng pahintulot ang

orihinal na mga partido at ng ikatlong tao.

Case Illustration:

FACTS

Licaros, after having invested in Anglo-Asean, encountered tremendous and unexplained

difficulties in retrieving, not only the interest or profits, but even the very investments he had put
in Anglo-Asea

Confronted with the dire prospect of not getting back any of his investments, Licaros then decide
to seek the counsel of Antonio P. Gatmaitan, a reputable banker and investment manager who
had been extending managerial, financial and investment consultancy services to various firms
and corporations both here and abroad. To Licaros’ relief, Gatmaitan was only too willing
enough to help. Gatmaitan voluntarily offered to assume the payment of Anglo-Asean’s
indebtedness to Licaros subject to certain terms and conditions.

Thereafter, Gatmaitan presented to Anglo-Asean the Memorandum of Agreement earlier

executed by him and Licaros for the purpose of collecting the latter’s placement thereat of U.S.
$150,000.00. Albeit the officers of Anglo-Asean allegedly committed themselves to “look into
[this matter]”, no formal response was ever made by said bank to either Licaros or Gatmaitan. To
date, Anglo-Asean has not acted on Gatmaitan’s monetary claims.

Evidently, because of his inability to collect from Anglo-Asean, Gatmaitan did not bother
anymore to make good his promise to pay Licaros the amount stated in his promissory note (Exh.
“A”; also Exh. 2″). Licaros, however, thought differently. He felt that he had a right to collect on
the basis of the promissory note regardless of the outcome of Gatmaitan’s recovery efforts. Thus,
in July, 1996, Licaros, thru counsel, addressed successive demand letters to Gatmaitan (Exhs.
“C” and “D”), demanding payment of the later’s obligations under the promissory note.
Gatmaitan, however, did not accede to these demands.

ISSUES

Whether the Memorandum of Agreement between petitioner and respondent is one of assignment
of credit or one of conventional subrogation?

Whether or not respondent became liable to rhe petitioner?

HELD

We agree with the finding of the Court of Appeals that the Memorandum of Agreement dated
July 29, 1988 was in the nature of a conventional subrogation which requires the consent of the
debtor, Anglo-Asean Bank, for its validity.

The respondent is not liable to the petitioner.

Article 1302
It is presumed that there is legal subrogation:

(1) When a creditor pays another creditor who is preferred, even without the debtor’s
knowledge;

(2) When a third person, not interested in the obligation, pays with the express or tacit
approval of the debtor;

(3) When, even without the knowledge of the debtor, a person interested in the fulfillment
of the obligation pays, without prejudice to the effects of confusion as to the latter’s share.
(1210a)

Discussion:

Subrogation means the substitution of one claim for another, especially the transfer of the right to
receive payment of a debt to somebody other than the original. Based on article 1302 the third
person may pay the amount the obligation of a debtor to the creditor even without his
knowledge, in the Case of Gaysano vs. North American Insurance, Gaysano declined to pay his
debt to Levis International due to fortuitous event, but the Levis international supported his claim
on the obligation of Gaysano based on the legal subrogation aside from the Article 1302.

Article 1303
Subrogation transfers to the persons subrogated the credit with all the rights thereto
appertaining, either against the debtor or against third person, be they guarantors or
possessors of mortgages, subject to stipulation in a conventional subrogation. (1212a)

Ang subrogation ang naglilipat sa mga taong subrogated ang inutang kasama ang lahat ng
karapatan na ukol, alinman laban sa may utang o ikatlong tao, sila man ay mga guarantor o
possessor ng sanla, batay sa sinasaad ng kasunduan ng conventional subrogation. (1212a)

Discussion:

The effect of legal sugbrogation is to transfer to the new creditor the credit and all the rights and
actions that could have been exercised by the former creditor either against the debtor or against
third persons, be they guarantors or mortgagor. Simply stated, except only for the change in the
person of the creditor, the obligation subsists in all respects as before the novation.

If the credit transferred to the new creditor is subject to a suspensive condition, the credit cannot
be collected until after the fulfillment of the said condition.

Case Illustration: Malayan Insurance Co., Inc. vs. Rodelio Alberto and Enrico Alberto Reyes

Article 1304
A creditor, to whom partial payment has been made, may exercise his right for the
remainder, and he shall be preferred to the person who has been subrogated in his place in
virtue of the partial payment of the same credit.

Ang nagpautang, kung saan ang hindi pa na buong kabayaran ay ginawa, maaaring
isakatuparan ang kanyang karapatan para sa mga natira, at sya ay mas gusto para sa ibang tao
para sa kanyang lugar sa ngalan ng kahalagan ng hindi buong bayad ng parehong inutang.

Somes v. Molina

Facts: B bought property from X on the installment plan (4 installments). S acted as surety (a
guarantor who bound himself solidarily with B). When B failed to pay the first installment, X
sued B and S, and judgment was entered against him. S, fearful for his rights, then brought an
action to have himself declared subrogated in the rights of X. He did this because he wanted to
paid first, from the assets of B. In other words, he wanted to be preferred over X, the seller; he
did not want X to be paid first for the judgment.

Held: S cannot be preferred. As a matter of fact, it is X to whom the law grants preference
because X is a creditor to whom only a partial payment has been made.